AUD, other Asian FX bid on CNY rebound

John Hardy

Head of FX Strategy

Summary: AUD is in focus on the PBoC's reset of the USDCNY rate, with Asian FX in general likely to see a broad bid in the near term.

The AUD has rebounded sharply after the Chinese renminbi posted its strongest session in a couple of weeks after the People's Bank of China set the USDCNY rate lower overnight. Asian FX may be off to the races for the nearest term if the market decides that China will boost its currency for now. Meanwhile, a pivotal US jobs report looms tomorrow.

The US equity rally surge yesterday faded into the close and thus into the end of the month as the attempt at retaking the prior major low remains in doubt. But sentiment was tilted toward positive in Asia, and yesterday’s extension of the USD rally was pushed back across the board as China fixed USDCNY a bit lower after new highs for the cycle were poked at yesterday. USDCNY followed through a bit more to the downside than it has in previous sell-offs and trades in Asia took the ball and ran with it. We are a month away from the Trump/Xi meeting at the G20 in Buenos Aires, providing plenty of leeway for back and forth if China holds the line or even decides to move the CNY a percentage point or two stronger into that meeting.

Sterling found sudden encouragement from headlines yesterday after UK Brexit secretary Dominic Raab said that he expects a Brexit deal could be finalized by November 21, on the same day that EU officials were downplaying the progress in talks and the FT quoted one EU diplomat saying it was “very unlikely” that the November Brexit summit will go forward unless the UK negotiating position move significantly. For now, we can only say the move looks technically encouraging on the charts for sterling, but the move sets up the need for further confirmation that we are heading toward a Brexit breakthrough and a November summit and a fresh breakdown in talks would likely send sterling right back where it came from.

[Update: Sterling is coming under pressure again as UK officials deny this morning's Times story suggesting that UK banks would be allowed access to the EU post-Brexit.]

The bounce in sterling extended sharply this morning on a story that agreement has been reached for UK banks to retain access to the EU post Brexit. The good news came just in time for GBPUSD, which was headed for a test of sub 1.2700 range lows before the news took the pair all the way back to 1.2900 as of this writing.

AUDUSD jumped back sharply higher as the Australian trade balance data for September surged much higher into surplus than expected, mostly on a drop in imports, especially capital goods. This does nothing to allay our concerns about the credit cycle turning in Australia, but the short term squeeze potential is certainly there in November if China boosts its currency for the next few weeks and risky assets find good cheer. The AUD is perhaps also gaining a bit of momentum as it has broken higher, or is close to doing so, in several crosses like EURAUD, AUDJPY and AUDCAD.

Chart: AUDUSD

The Aussie and kiwi are the two most sensitive currencies to CNY moves and the rally in the CNY overnight has inspired across the board strength in AUD, with AUDUSD looking at a new, almost one-month high if it closes near current levels. This is a significant impulse and speculative positioning is the wrong way around here if China decides to give its currency a fillip for the balance of November. The next major area higher looks like 0.7300.

USD – the US dollar is on its back foot suddenly after the recent run higher that faltered right at the range support level in EURUSD. The next key for the greenback is the jobs report tomorrow

EUR – the euro bouncing off the last change support near 1.1300, with the weekly close after the US jobs report as the next key test.

JPY – this is not an environment (improving risk appetite, bond yields picking back up) that favors JPY outperformance – next major test of USDJPY is tomorrow’s US jobs report and whether US yields pick back up sharply on a new high for the cycle in earnings.

GBP – the UK bank access news is a breakthrough and the next step is the actual announcement of a Brexit summit, which is only likely if the two sides are moving toward an agreement. The sticky bit will be the terms and whether the deal is palatable to all Tories, and if not, whether a sufficiently large minority of Labour votes can be put together when Parliament votes. Bank of England Up later today – latest inflation data muted, but UK austerity is ending and BoE ready to hike if Brexit uncertainty lifts.

CHF – If a lid is kept on EU existential risks here and equity markets find their sea legs, a fresh rise in bond yields could make CHF one of the weakest currencies – or the weakest currency – in G10.

AUD – AUD is very bid across the board. If China is going to make a statement in defense of its currency ahead of the key Trump/Xi meeting at the end of this month, there is plenty of room for a squeeze on AUD shorts, even if our longer term concerns for the currency remain in place.

CAD – weaker link to Asian FX bounce overnight inspired by strong CNY and weak oil prices keeping CAD under pressure in relative terms, though USDCAD unlikely to escape a weaker US dollar if the latter can’t find a bid on the US jobs report tomorrow.

SEK – a solid PMI this morning, but the general buoyancy in risk appetite and the strong bid in the smaller currencies a key driver here. EURSEK suddenly staring down the range lows just below 10.30, which is also the 200-day moving average; we like it lower as long as risk appetite remains steady.

NOK – weak oil prices see underperformance versus SEK and new local lows in NOKSEK, but also constructive for potential lower in EURNOK on a longer-term valuation perspective.

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